Posted by: donmihaihai | October 30, 2008

It’s time to get rich.

I take back my words. The opportunities are so good that I sold SP Chems at a low valuation, a price lower than the cash offer for delisting and put that money in work again. A returned of 30% annualized from the initial purchased date but I added alot after that. A fruitful period of 2 years and 5 months cut short by the cash offer from the majority shareholders.

This year, I am save by delisting offers, 1st is Midsouth follow by SP Chems. Now I hope that BrightWorld cash offer will get through by which hopefully I can find another attractive CPF approved stock to buy. There is no lack of attractive stocks to buy at this moment. Many are selling at such a wide discount but I think only few are buying while many are holding on to their stock. Almost all players in the market know that many are cheap but what they are like what WB said in 1974.

“Today on Wall Street they say, ‘Yes, it’s cheap, but it’s not going to go up.’ That’s silly.”

The silliest quote is by an economist from CIMB ” While it is a great idea to buy when valuations are looking increasingly bombed-out, UNLESS YOU HAVE THE DEEP POCKET AND CAN WAIT VERY PATIENTLY, LIKE WB, YOU MAY PREFER TO WAIT UNTIL THE DUST HAS SOMEWHAT SETTLED.”

It seems like only WB and the selected few have the two qualities of deep pocket and patient. Then since I don’t have deep pocket, I should be selling.

I was so excited when the buy orders for Jaya, Micro Mech and China Angel got through. It doesn’t bother me whether if the stock prices drop after that. It bothers me as I am unable to buy when seeing stocks at selling at distressed level. It is like being surrounded by countless of pretty ladies BUT with boyfriends or husbands.

Jaya

Jaya closed at $0.55 yesterday and the lowest it traded recently was at $0.495. Jaya FY2008 ROE was 34% and at $0.55, it is traded at 2.8X earnings, 0.97X NBV and dividend yield of 23.6% based on the declared FY2008 dividends. Better still, Jaya will be paying 7.5cents dividend in Nov and the chances of paying $0.20 dividends(including $0.075) in one year time is very high. How can one get wrong with that? Oh ya, with so many stocks selling at below NBV, why Jaya? Why not EZRA which is selling at less than 0.5X NBV, which is also in the same industry?

What make Jaya different is outstanding cashflow, high ROE and vessel capitalised at cost of building not market price. While I don’t like the increasing debts due to aggressive scaling up of building program, it can be pay down easily by halting the scale up and with strong cashflow and sale of vessels without even damaging Jaya businesses. Which mean if Jaya can achieve debt free easily if it wanted to.

What about the declining crude oil price which lead to decreasing in investment in the industry? Before that, let look at some good news( to me, high oil price = good news and low oil price = bad news because it is stupid and I don’t want to lead a misery life at old age) BT has an article which said that IEA put the rate of production decline for world biggest oilfields at 9.1%. This is the 1st time some authority comes out with such a high rate of decline. While this number may not mean much to people like me, it is going to struck hard on all kind of authorities which include governments because it basically double the decline rate of below 5% that was widely circulated prior to this.

More good news. By recent Matthew R. Simmons speech.

Decline rates are a steep treadmill. The scarcity of solid data on decline rate has created sort of a fog of war. Some authorities still argue that decline rates are low and manageable. CERA’s report this summer really pooh-poohed any danger of rising decline rates, and said through their incredible database, the average of the world is only 4.5 percent per annum. Other authorities estimate 8 percent per annum. I was surprised at an energy conference our firm gave in Scotland, we had Andrew Gould of Schlumberger as keynote speaker, and several times in the last three years, Andrew has used the number of “we think the average rate is 8 percent.” He was asked about that afterwards, and he said, “Well, I don’t want to go there. I got the 8 percent per annum from Harry Longwill at Exxon. He’s retired now, so I don’t know what it is.” I addressed a group of the top 150 people at Baker Hughes a year ago from all around the world, and I talked a lot about the mystery of the decline rates and these various averages, and I said, “Okay, of all you 150 people here, I’d be interested in a show of hands, how many of you think the average decline rate of all the projects you’re working on is only 5 percent or less?” And not a single hand went up. “How about around 8 percent?” And about half the room raised their hands. And I said, “How about over 10?” And about half the room raised their hands.

Even better news for deepwater oilfields. By recent Matthew R. Simmons speech.

This graph though was a real surprise to me when I finally gathered the data together. These are basically 10 key deepwater fields that came on in the sort of last seven years. You’ve got Ram Powell, Pompano, Hoover, Genesis, Europa, Brutus, Boombang, Ursa, Mars and Auger. Ursa and Mars collectively –as referred to this morning – is the largest producing oil field in the Gulf of Mexico, but it’s also interesting to see that these two fields collectively produce 362,000 barrels a day in 2001, and by 2007, they’re down to 132,000. The other eight fields peaked in various years but at the peak they produced almost 400,000 barrels a day – 397,000 – and as of the first half of 2007, they’re down to 110. And when you divide the 110 into the eight fields, the average production is 13,000 barrels a field. To see a field like Auger – I remember when that came on and it seemed so monstrous – or Ram Powell, basically now be down – Auger is now to 14,000 barrels a day, Ram Powell is down to 12,000 barrels a day. It took five years for these fields to go from peak to basically 20 percent of what they peaked. And this same production profile I’m told with some bit of authority will be exactly what we experience in the deep-water in west Africa, in Angola and Nigeria. We’re basically doing just-in-time production to make the IRs work on deepwater production.

Crude oil price crashing down, recession coming is not scary. What scary is when ask “And then what?” if oil price stay low, say under 50 for a long time. While OSV is not as rosy as before due to increasing completion of vessel, it should still be a good place to be and paying distressed price for a pretty ok company in a pretty ok industry is like extraordinary.

Micro Mech

Sure Micro Mech does not have a dividend yield of >20% but at price of $0.425, its dividend yield is at 11.8%, ROE at >20% for last FY and trading at 1.57X NBV and 6.6X earnings. I must say finally, the price is at a level where I have not doubt that by looking at opportunity cost, it is worthwhile to buy more for me. There is really nothing much to say about Micro Mech other than I think buying a quality company with outstanding peoples running it at this level is always better and safer than many much cheaper in term of basic standard valuation methods.

China Angel

China Angel closed at $0.09 yesterday and the lowest it hit recently should be around $0.065. But whatever it is, it is a Net-net stock, selling at below working capital. China Angel has no danger of going under but in fact out of its 3 business units, the business of selling mooncake will going to generate outstanding return while the other 2 can be so-so or bad. But nevertheless, buying a stock with high cashflow generating, little capital requirement and sharing the majority of the mooncake market in Guangdong for gift with Meixin even its get kicked out of the other 2 business units can’t be too wrong. The downside of being wrong is not much but the upside can be anything.

Lastly, seeing it with my own eyes, that the China Chinese do not consume is a myth. It is not about how many percent, it is about who is consuming, how they consume and the future is like. And many of the local companies are going to ride and benefit from it which includes those listed in SGX. Many winners, different kind of winners but before that, they must be managed prudently as the battle ground is not going to be easy. The chances of China Angel being one of those companies are high.

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